Sir,
David Wighton (August 25, page 47) usefully draws attention to the resurgence of interest in a return to the gold standard in the USA. However, certain of his assertions stand in need of factual correction.

The volatility in recent years of the price of gold, which he cites as a problem, is not a causal factor. It is rather a reflection of the widespread mistrust of the mountain of paper money that has been printed by the Federal Reserve, at no cost to the Bank, with the consequent loss of public confidence in the ability of that money’s purchasing power to be sustained.

In fact, that inflation was caused by the Federal Reserve

Mr Wighton refers to the American inflation in the 1920s, but this had nothing to do with the gold standard. In fact, that inflation was caused by the Federal Reserve, established only a few years earlier. It’s misguided obsession with price stabilisation led it to force down interest rates and this was followed by a massive expansion in credit that grew from $45 billion in 1921 to $73 billion in 1929. It was this that fuelled the stock market frenzy that inevitably crashed and ushered in the depression.

His reference to the “success” of central banks in maintaining price levels in recent years is an exact parallel of what happened then. The principal beneficiaries of the practice of “quantitative easing” (pumping more and more credit into the system) are always those who get their hands on the money first, before debasement takes hold. The banks now holding fresh supplies of low-cost government debt can use it to make huge profits on the loan market while relative price stability is maintained. By the time it reaches the wider economy the misallocations it has caused lead to an inescapable loss of purchasing power.

Mr Wighton’s final complaint, that the supply of gold expands more slowly than the potential for economic activity, is the very reason why any money supply anchored to gold is bound to be more stable than the paper money now flooding economies in the USA, Europe and the UK. The fall in prices that follow would simply be the inevitable correction of years of profligate credit creation, rather than the deflationary demon that modern economists and governments are so fearful of.